CAIIB · RM

CREDIT RISK MODELS

Chapter notes, video classes, MCQ practice tests and quick-revision one-liners for Risk Management (Elective) — CAIIB.

1 video class 66 one-liners

Quick revision

One-liners from this chapter

Free sample — 8 of 66 rapid-fire Q&A cards.

What is a credit risk model in the context of banking?

A credit risk model is a quantitative tool used by banks to estimate the probability of default, loss given default, and exposure at default for a borrower or portfolio, aiding in risk measurement and capital allocation.

What is the Merton model in credit risk and what does it assume about firm assets?

Structural model treating firm equity as a call option on assets.

What does the term 'Probability of Default' (PD) signify in credit risk modelling?

PD represents the likelihood that a borrower will fail to meet their debt obligations within a specified time horizon, typically one year, and is a core parameter in IRB approaches under Basel II/III.

What does the term 'Distance to Default' (DD) measure in credit risk modelling?

Number of standard deviations asset value is from the default threshold.

How is 'Loss Given Default' (LGD) defined in credit risk models?

LGD is the proportion of the exposure that a bank expects to lose if a borrower defaults, expressed as a percentage of EAD, and reflects the severity of loss after accounting for recoveries and collateral.

What is the Basel II definition of default used in credit risk models?

Obligor is 90 days past due or unlikely to repay.

What is 'Exposure at Default' (EAD) in credit risk measurement?

EAD is the total value of a bank's exposure to a borrower at the time of default, including drawn amounts and an estimate of undrawn committed facilities that may be drawn before default.

What is 'Recovery Rate' (RR) and how is it related to LGD?

Recovery Rate equals one minus LGD; it is the portion recovered after default.

Unlock all 66 one-liners

Self-quiz mode with hidden answers + printable deck.

Open the deck

Watch & learn